Russia’s sovereign default risk: into the red zone
16 March 2022 Russia
Image: AdobeStock/Pavel Parmenov
Payment of coupons in RUR on Russia USD-denominated sovereign bonds due on 16 March will represent a sovereign default once the 30-day grace period has passed, Fitch Ratings confirmed today.
These USD-denominated government debt coupons, which are due for payment today, are the first foreign-currency sovereign income payments to fall due since Russia issued its Presidential Decree on 5 March which applies differential treatment to bondholders in countries that have enforced sanctions against Russia.
On 8 March, Fitch downgraded Russia’s Long-term Foreign Currency Issuer Default Rating (LT FC IDR) to a ‘C’ rating, suggesting that a default or a default-like process had already begun on this Russia sovereign debt.
Should it occur, this forced redenomination of payment commitments — with coupon payments being issued in local currency rather than USD as defined by the bond covenant — will constitute a default.
At this point, Fitch expects to lower the ratings on the affected bond issue to a ‘D’ and the LT FC IDR will be revised downwards to ‘Restricted Default’ if the required income payments are not delivered in USD, in accordance with the covenant, by the end of the grace period.
For Russian local-currency sovereign debt, Fitch currently marks the LT FC IDR to a ‘C’ rating, in line with the issuer’s failure to credit cross-border investors with local currency OFZ coupons due for payment on 2 March.
The ratings agency understands that coupon payments were paid on these 2024-maturity OFZs by the Russian Ministry of Finance to the National Settlement Depository, the Russian CSD, but these were not paid out to foreign investors owing to restrictions on outgoing cross-border payments imposed by the Russian central bank.
This will constitute a default if the payments are not made good to foreign investors by the end of the 30-day grace period.
Fitch indicates that it has applied a 30-day grace period to this ratings action in the absence of relevant OFZ documentation which clarifies whether a grace period applies.
Major post-trade infrastructure providers have restricted settlement of RUR payment transactions and settlement of securities transactions on their platforms.
On 3 March, DTCC indicated it has blocked Russian securities from the Bank of Russia and The Ministry of Finance of the Russian Federation in response to the Russian invasion of Ukraine.
The move from DTCC follows Euroclear Bank’s announcement outlining it is no longer accepting RUR as a settlement currency. Having disabled its account with ING Bank, its cash correspondent in Moscow, Euroclear confirmed on 16 March that it will not process wire transfers from the Euroclear system to final beneficiary accounts outside of Russia.
Deutsche Börse-owned Clearstream also told Asset Servicing Times, our sister publication, that settlement in certain security codes is no longer possible on its platform.
These USD-denominated government debt coupons, which are due for payment today, are the first foreign-currency sovereign income payments to fall due since Russia issued its Presidential Decree on 5 March which applies differential treatment to bondholders in countries that have enforced sanctions against Russia.
On 8 March, Fitch downgraded Russia’s Long-term Foreign Currency Issuer Default Rating (LT FC IDR) to a ‘C’ rating, suggesting that a default or a default-like process had already begun on this Russia sovereign debt.
Should it occur, this forced redenomination of payment commitments — with coupon payments being issued in local currency rather than USD as defined by the bond covenant — will constitute a default.
At this point, Fitch expects to lower the ratings on the affected bond issue to a ‘D’ and the LT FC IDR will be revised downwards to ‘Restricted Default’ if the required income payments are not delivered in USD, in accordance with the covenant, by the end of the grace period.
For Russian local-currency sovereign debt, Fitch currently marks the LT FC IDR to a ‘C’ rating, in line with the issuer’s failure to credit cross-border investors with local currency OFZ coupons due for payment on 2 March.
The ratings agency understands that coupon payments were paid on these 2024-maturity OFZs by the Russian Ministry of Finance to the National Settlement Depository, the Russian CSD, but these were not paid out to foreign investors owing to restrictions on outgoing cross-border payments imposed by the Russian central bank.
This will constitute a default if the payments are not made good to foreign investors by the end of the 30-day grace period.
Fitch indicates that it has applied a 30-day grace period to this ratings action in the absence of relevant OFZ documentation which clarifies whether a grace period applies.
Major post-trade infrastructure providers have restricted settlement of RUR payment transactions and settlement of securities transactions on their platforms.
On 3 March, DTCC indicated it has blocked Russian securities from the Bank of Russia and The Ministry of Finance of the Russian Federation in response to the Russian invasion of Ukraine.
The move from DTCC follows Euroclear Bank’s announcement outlining it is no longer accepting RUR as a settlement currency. Having disabled its account with ING Bank, its cash correspondent in Moscow, Euroclear confirmed on 16 March that it will not process wire transfers from the Euroclear system to final beneficiary accounts outside of Russia.
Deutsche Börse-owned Clearstream also told Asset Servicing Times, our sister publication, that settlement in certain security codes is no longer possible on its platform.
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